On 30 March 2023, the UK Government published (i) its updated Green Finance Strategy (Strategy) and (ii) a consultation on the future regulatory regime for Environmental, Social, and Governance (ESG) ratings providers (Consultation). Both publications are part of a wider set of ESG-related publications such as the Powering Up Britain – Net Zero Growth Plan and Energy Security Plan (which we cover in more detail here) and the more recent consultation on addressing carbon leakage risk to support decarbonisation.

In summary:

  • the Consultation introduces the new regime for ESG ratings providers as signposted in the Edinburgh Reforms unveiled by the Chancellor of the Exchequer, Jeremy Hunt, in December 2022. The Consultation will close on 30 June 2023.; and
  • the Strategy outlines the Government’s policy for mitigating climate risk and how it intends to pursue its ambition to become the world’s first Net Zero-aligned Financial Centre. The key aspect of the Strategy is the insights as to next steps on the long-awaited UK Green Taxonomy. A consultation on this is expected in the Autumn of 2023.

More details below.

The Strategy

The Strategy is an update to the UK’s 2019 Green Finance Strategy – some of the key updates from a financial regulatory perspective include:

  • delivering a UK Green Taxonomy. As a reminder of the state of play of the UK Green Taxonomy, the EU Taxonomy was onshored in the UK as part of the Brexit process but the EU Level 2 (technical screening criteria – which was not yet implemented in the EU) was not onshored. The UK Government was supposed to adopt UK technical screening criteria by 1 Jan 2023. However, on 14th December the Government indicated that the EU Taxonomy as onshored in the UK will be repealed by the Financial Services and Markets Bill (FMSB) along with the associated technical screening criteria requirements. The Government indicated that it would provide a further update on the UK Green Taxonomy as part of its Green Finance Strategy, which indeed it has. In the meantime, the Green Technical Advisory Group (GTAG) has been feeding into the Government’s policy on the Taxonomy and published advice on the development of this on 1 October 2022.

The Strategy does not provide a huge amount of insight as to the UK Green Taxonomy, but it does indicate that:

    • the Government is committed to delivering this;
    • it will include nuclear technology;
    • the regime will be proportionate so that it does not place an undue burden on companies whose size or scale makes the disclosure of taxonomy-related information unreasonable;
    • a consultation is expected in Autumn 2023 (which will propose the inclusion of nuclear technology as well); and
    • once the UK Green Taxonomy is finalised, it is expected that a two-year voluntary reporting requirement will be established before being replaced with a mandatory one.
  • introducing a new regime for ESG ratings providers (see further below);
  • committing to consult on the introduction of disclosure requirements, initially, for the UK’s largest listed companies and, later on, for private companies to disclose their transition plans if available, therefore replacing the existing requirement to disclose transition plans on a “comply or explain” basis;
  • assessing the financial reporting standards expected by the International Sustainability Standards Board in summer 2023 for their suitability in the UK;
  • reviewing the regulatory framework for the effective stewardship in respect of climate and environmental oversight, including the operation of the UK Stewardship Code;
  • monitoring the Stewardship Guidance (in late 2023) and clarifying the fiduciary duty; and
  • commissioning an industry-led market review to identify ways to facilitate raising transition capital (i.e., products and services that support higher emitting companies to decarbonise and reduce their environmental impact).

The Consultation

The Consultation builds on one of the Strategy’s action points (as first signposted in the Edinburgh Reforms), the introduction of a new regime for ESG ratings providers. Market participants had expressed their concerns about ESG ratings to the FCA in respect of the methodologies and objectives used by ESG ratings providers highlighting, among others, their lack of transparency, poor governance and systems and controls (see FS 22/4). In this context, the FCA concluded that ESG ratings providers need to be regulated when the ESG ratings and data are used in financial markets.

The table below sets out the key components of the proposed regime.

Features of new regulated activity Description
What activity?
  • New regulated activity of providing directly an ESG rating to a user in the UK, in relation to an RAO specified investment, unless an exclusion applies.
  • Possible extension to capture the indirect provision of ESG ratings assessments, and where these assessments are used in relation activities other than RAO specified investments.
Which ESG “ratings” are captured?
  • Broad interpretation: an ESG rating would cover an assessment regarding one or more ESG factors, whether or not it is labelled as such.
  • It intends to include ESG assessments produced by analysts as well as generated through an algorithm, and in both cases when tied to use in financial markets.
  • Data where no assessment is present are excluded.
Territorial scope
  • The proposed regime captures the direct provision of ESG ratings to users (both institutional and retail) in the UK, by both UK firms and overseas firms.
  • The direct provision intends to capture where an ESG rating is provided to a UK user who has paid for that rating, either on its own or as part of another service or bundle of products. It does not intend to capture scenarios where a UK user accesses a free rating.
  • Possible extension to capture the indirect provision of ESG ratings to UK users (e.g., an ESG ratings provider does not have a contractual agreement with a UK user, but its ESG ratings become available to UK users anyway via intermediaries).
  • Ratings in respect of non-RAO specified investments, such as voluntary carbon credits, are excluded; HM Treasury will consider whether these kinds of ESG ratings should be covered in a different way.
  • ESG ratings by not-for-profit entities are excluded.
  • ESG ratings created for one’s own use or for the group’s use (i.e., a firm creates an ESG rating for their own internal and external use or for use by other entities in their group) – relevant for firms like asset managers, who may create their own ratings for internal use only, such as to make investment decisions.
  • Credit ratings which consider the impact of ESG factors on creditworthiness since these are already captured by the Credit Ratings Agencies Regulation.
  • Investment research products, such as equity research reports.
  • External reviews, including second-party opinions, verifications, and certifications of ESG-labelled bonds (these may be captured by different requirements).
  • Proxy advisor services, such as voting or recommendations to shareholders of firms (some are already regulated by the FCA).
  • Consulting services, even where these relate to ESG matters, in case they do not systematically influence capital allocation (expected caveat is proposed for one-off ratings for IPO purposes).
  • Academic research or journalism, even where that relates to ESG matters.
  • Unclear whether the new perimeter would capture all ESG ratings providers or would exclude “small providers”.
  • If an exclusion for “small providers” were to be introduced, the methodology for making this assessment should also be defined (e.g. turnover, balance sheet total, number of employees, etc.)
Applicable requirements for authorised entities
  • ESG services providers would need to comply with certain requirements. HM Treasury expects these requirements to be built on IOSCO’s recommended key regulatory outcomes.

For ESG ratings providers that are captured by the proposed extended regulatory perimeter, the FCA is expected to consult on the applicable requirements for these providers. HM Treasury and the FCA have indicated that the proposed requirements would take into account IOSCO’s recommended key regulatory outcomes. In the meantime, a voluntary Code of Conduct for ESG rating and data providers developed by an industry working group is expected to be introduced that will also be in line with IOSCO’s recommendations and hence may have some similarities with potential FCA regulation.

If you would like to discuss how this proposed framework may impact you, please do not hesitate to contact us.


Clive Cunningham
Clive Cunningham
+44 20 7466 2278
Marina Reason
Marina Reason
+44 20 7466 2288
Kelesi Blundell
Kelesi Blundell
+44 20 7466 7477
Ioannis Asimakopoulos
Ioannis Asimakopoulos
+44 20 7466 3510